CBOE Holdings, Inc. Reports Third Quarter 2010 Results

Revenues Up 8 Percent to $106.0 Million
Third Quarter Adjusted Net Income Increases 41 Percent to $27.0 Million(1); Adjusted Diluted EPS of $0.26(1)
Third Quarter GAAP Net Income Up 7 Percent to $20.5 Million; Diluted EPS of $0.20
Average Transaction Fee Per Contract Increases 15 Percent

(1) A full reconciliation of our non-GAAP results to our GAAP results for the 2010 reporting periods is included in the attached tables. There are no adjustments relating to the prior year periods. See "Non-GAAP Information" in the accompanying financial tables.

CBOE Holdings, Inc. (Nasdaq: CBOE ) today reported third quarter 2010 GAAP net income of $20.5 million , an increase of 7 percent compared with $19.2 million in the third quarter of 2009. GAAP diluted earnings per share were $0.20 compared with $0.21 in the third quarter of 2009.

Adjusted net income, which excludes the impact of the accelerated recognition of stock-based compensation expense, was $27.0 million for the third quarter of 2010, an increase of 41 percent compared with adjusted net income of $19.2 million in the third quarter of 2009. Adjusted diluted earnings per share were $0.26 compared with $0.21 in the third quarter of 2009. During the quarter, the company accelerated the recognition of stock-based compensation expense tied to employment agreements with certain executives for an after tax effect of $6.5 million , or $0.06 per diluted share.

For the nine months ended September 30, 2010 , the company reported GAAP net income of $68.0 million , or $0.71 per diluted share, on total operating revenues of $319.7 million . For the comparable period last year, the company reported GAAP net income of $71.5 million , or $0.79 per diluted share, on operating revenues of $305.2 million . Adjusted net income for the first nine months of 2010 was $74.5 million , or $0.78 per diluted share.

"Solid third quarter operating results demonstrate CBOE Holdings ' ability to deliver in the short term while continuing to invest in initiatives to drive long-term growth," said William J. Brodsky , CBOE Holdings Chairman and Chief Executive Officer. "I'm pleased with our performance, particularly given an economic backdrop that dampened trading volume industry wide during the period. We are encouraged by recent signs that volume is returning to stronger levels, and continue to take actions to drive future growth such as the recent launch of C2, our new all-electronic exchange. We are confident that our commitment to cost control, customer service, product innovation and options education will enable CBOE Holdings to deliver value for our shareholders over the long run."

"Our third quarter results demonstrate the discipline with which we continue to manage our business," commented Alan J. Dean , CBOE Holdings Executive Vice President and Chief Financial Officer. "Our results benefited from our new post-demutualization trading permit program and lower expenses. Moving forward, we remain focused on achieving profitable growth, maintaining stringent cost controls and continuing to identify additional growth opportunities."

The table below highlights CBOE Holdings ' operating results for the comparative quarters and nine-month periods ended September 30, 2010 and 2009.

Key Statistics and Financial Highlights:

($ in millions, except per share and fee per contract)	3Q 2010	3Q 2009	Y/Y	YTD 2010	YTD 2009	Y/Y

Key Statistics:
Average Daily Volume	3.73	4.49	-17%	4.52	4.56	-1%
Total Trading Volume	238.4	287.2	-17%	850.7	857.5	-1%
Average Transaction Fee Per Contract	$0.306	$0.266	15%	$0.294	$0.277	6%
GAAP Financial Highlights:
Total Operating Revenues	$106.0	$ 98.2	8%	$319.7	$305.2	5%
Total Operating Expenses	71.1	65.2	9%	204.2	184.3	11%
Operating Income	34.9	33.0	6%	115.5	120.9	-4%
Operating Margin %	33.0%	33.6%	-0.6 pts	36.1%	39.6%	-3.5 pts
Net Income	$ 20.5	$ 19.2	7%	$ 68.0	$ 71.5	-5%
Diluted EPS	$ 0.20	$ 0.21	-5%	$ 0.71	$ 0.79	-10%
Adjusted Financial Highlights(1):
Total Operating Expenses	$ 60.1	$ 65.2	-8%	$193.3	$184.3	5%
Operating Income	45.9	33.0	39%	126.5	120.9	5%
Operating Margin %	43.3%	33.6%	9.7 pts	39.6%	39.6%	-
Net Income	$ 27.0	$ 19.2	41%	$ 74.5	$ 71.5	4%
Diluted EPS	$ 0.26	$ 0.21	24%	$ 0.78	$ 0.79	-1%

Revenues

Total operating revenues for the third quarter increased $7.8 million, or 8 percent, to $106.0 million. This increase was primarily driven by a $13.5 million increase in access fees tied to a new trading access program. On July 1, 2010, CBOE began charging monthly fees to trading permit holders. Prior to the company's demutualization, trading permit holders that were CBOE members, or seat holders, were not assessed an access fee; the fee was only assessed to temporary members and interim trading permit holders. The increase in access fees was partially offset by a $3.4 million decline in transaction fees and a $1.4 million decrease in exchange services and other fees.

Transaction fees in the third quarter decreased 4 percent compared with the same period last year, reflecting a 17 percent decline in trading volume, substantially offset by a 15 percent increase in the average transaction fee per contract. Trading volume for the third quarter was 238.4 million contracts, or 3.73 million contracts per day, versus 287.2 million contracts, or 4.49 million contracts per day, in the third quarter of 2009. The average transaction fee per contract was $0.306 for the quarter compared with $0.266 in the third quarter of 2009.

The increase in the average transaction fee per contract primarily resulted from a shift in the volume mix and lower volume discounts. In the third quarter, higher margin index options accounted for a larger percentage of options contracts traded, representing 25.2 percent of total options contracts traded versus 19.1 percent in the third quarter of 2009. The average transaction fee per contract represents total transaction fee revenue divided by total reported trading volume for the Chicago Board Options Exchange (CBOE) and the CBOE Futures Exchange (CFE).

Exchange services and other fees were lower in the quarter, primarily due to the elimination of the hybrid electronic quoting fee and lower revenue from data services fees.

Expenses

Total third-quarter GAAP operating expenses grew $5.9 million to $71.1 million, primarily due to an $11.0 million pretax charge for the accelerated recognition of stock-based compensation expense. The company recorded this expense in the quarter to recognize the remaining fair value of the stock-based compensation awards granted to certain executives due to provisions contained in their employment agreements, including $6.7 million which should have been recorded in the second quarter. The Company determined that the exclusion of this expense adjustment to the second quarter 2010 financial statements was not material and accordingly a restatement of those financial statements was not necessary. The company expects to recognize an additional $2.0 million of accelerated stock-based compensation expense in the fourth quarter of 2010. Stock-based compensation expense to be recognized over the remaining vesting period will be reduced by the accelerated expense.

Adjusted operating expenses, which excludes the accelerated recognition of stock-based compensation expense, for the third quarter of 2010 declined $5.1 million, or 8 percent, to $60.1 million, compared with $65.2 million in the third quarter of 2009. Core operating expenses for the third quarter of 2010 declined $2.1 million to $39.2 million. Core operating expenses represent total operating expenses less depreciation and amortization, accelerated stock-based compensation expense and volume-based expenses. Volume-based expenses include royalty fees and trading volume incentives.

Core operating expenses for the 2010 third quarter include $4.0 million for the recognition of continuing stock-based compensation expense related to restricted stock grants awarded on June 15, 2010, but not the previously mentioned accelerated stock-based compensation expense. Core operating expenses, excluding the continuing stock-based compensation expense decreased $6.1 million, or 15 percent in the quarter.

Volume-based expenses of $13.8 million in the third quarter of 2010 decreased $3.2 million compared with last year's third quarter due to a $4.4 million decrease in trading volume incentives, offset somewhat by a $1.2 million increase in royalty fees. The decrease in trading volume incentives is primarily related to lower volume in equity and ETF options, which decreased 27 percent and 15 percent, respectively. The increase in royalty fees is directly related to higher trading volume in CBOE's licensed index products, with total volume in index options up 9 percent over last year's third quarter.

Operating Margin

The company's operating margin on a GAAP basis was 33.0 percent for the third quarter 2010 compared with 33.6 percent in the same period last year. On an adjusted basis, the company's operating margin increased 970 basis points to 43.3 percent for the third quarter, reflecting the company's stringent focus on controlling expenses.

Third Quarter 2010 Operational Highlights and Recent Developments:

On September 20, 2010, CBOE began disseminating calculations on two new volatility benchmark indexes based on options on futures contracts listed on CME Group exchanges. The CBOE/NYMEX WTI Volatility Index (ticker symbol OIV) and the CBOE/COMEX Gold Volatility Index (ticker symbol GVX) are the first in a series of new volatility benchmark indexes to be created as a result of the licensing agreement between CBOE and CME that was first announced in March 2010. Under this licensing agreement, CBOE will receive a percentage of the revenues generated.
On September 28, 2010, the CBOE Futures Exchange introduced trading in its first options on a futures contract - weekly options on VIX futures (ticker symbol - VOW).
On October 29, 2010, C2 Options Exchange, a new all-electronic exchange, began operations. C2 plans to list substantially all of the most active options classes and series in the Penny Pilot Program using a measured roll-out over a period of several weeks. C2 is structured to support a fully electronic marketplace for CBOE's flagship product, S&P 500 Index Options (SPX), which is expected to launch in the first quarter of 2011. C2 has a flexible structure, which provides greater strategic flexibility and offers broader opportunities in a highly competitive and rapidly changing options environment.
On November 1, 2010, CBOE reported that average daily volume (ADV) in October was 4.3 million contracts, a 14-percent increase from September 2010 ADV of 3.8 million contracts and a six-percent decline from October 2009 ADV of 4.6 million contracts.

Financial Guidance

CBOE Holdings currently expects the following for the fourth quarter of 2010:

Continuing stock-based compensation expense of $3.1 to $3.3 million and accelerated stock-based compensation expense of approximately $2.0 million, which will be excluded from adjusted earnings. This expense is included in employee costs.
Depreciation and amortization expense of $8.3 to $8.6 million. Increase in depreciation expense expected in the fourth quarter of 2010 compared with third quarter 2010 is due to the launch of C2.

Tender Offers

On October 13, 2010, CBOE Holdings launched two concurrent tender offers for 6,648,570 shares of its Class A-1 common stock and for 6,648,570 shares of its Class A-2 common stock, each at a price of $22.50 per share. The tender offers are scheduled to expire on Friday, November 12, 2010.

Dividend

On November 2, 2010, CBOE Holdings, Inc. announced that its Board of Directors declared a quarterly cash dividend of $0.10 per share. The dividend is payable December 24, 2010, to shareholders of record at the close of business on December 3, 2010.

Earnings Conference Call

Executives of CBOE Holdings will host a conference call to review its third quarter financial results today, November 4, 2010, at 8:30 a.m. EDT / 7:30 a.m. CDT. The conference call and any accompanying slides will be publicly available via live webcast from the Investor Relations section of the company's website at www.cboe.com under Events & Presentations. Participants may also listen via telephone by dialing (877) 372-0876 (877) 372-0876 from the United States or Canada, or (253) 237-1167 (253) 237-1167 for international callers. Telephone participants should place calls ten minutes prior to the start of the call.

The webcast will be archived on the company's website for replay. A telephone replay of the earnings call also will be available from approximately noon EDT, November 4, through midnight, November 18, by calling (800) 642-1687 (800) 642-1687 within the U.S. and Canada, or (706) 645-9291 (706) 645-9291 for international callers, using replay code 13316255.