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CME Group Inc. (Nasdaq: CME) today reported total revenues increased 71 percent to $563 million and net income increased 60 percent to $201 million for second-quarter 2008 compared with second-quarter 2007. Diluted earnings per share rose 3 percent to $3.67. The 2008 GAAP results reflect the operations of both Chicago Mercantile Exchange (CME) and Board of Trade of the City of Chicago (CBOT) and include: $6.7 million of CBOT merger-related operating expenses consisting of restructuring charges, integration and legal costs, and the acceleration of depreciation related to CBOT data centers; $13.2 million of costs related primarily to changes in the fair value of the company's FX hedge associated with its investment in BM&FBOVESPA SA; and a $3.6 million increase to non-operating expenses associated with the guarantee for holders of the Chicago Board Options Exchange (CBOE) exercise right privilege (ERP). The GAAP results for 2007 reflect the operations of CME only.
Pro forma non-GAAP diluted earnings per share in the second quarter were $3.93, a 12 percent increase versus second-quarter 2007. Pro forma results for second-quarter 2008 exclude the items listed above related to the CBOT merger, BM&FBOVESPA SA and the CBOE ERP guarantee. Pro forma non-GAAP revenues increased 10 percent to $563 million and net income increased 11 percent to $215 million for second-quarter 2008 compared with second-quarter 2007. The pro forma comparative results for 2007 reflect the operating results of both CME and CBOT as if they were combined. Pro forma measures do not replace and are not a substitute for GAAP financial results. They are provided to improve overall understanding of current financial performance and to provide a meaningful comparison with prior periods. A full reconciliation of these pro forma results is included in the attached tables.
"CME Group's product diversity helps customers mitigate risks across a wide array of asset classes, which is especially important in a challenging economy," said CME Group Executive Chairman Terry Duffy. "We have seen record quarterly volumes in our foreign exchange and commodities product lines, and view current market conditions for interest rates as a cyclical slowdown rather than a long-term issue. We have a number of new interest rate and treasury products in the pipeline -- including cleared swaps and inter-commodity spreads -- and continue to innovate within all our product lines as we extend distribution and enhance speed and functionality. We also continue to expand globally, and are on schedule to launch order routing from CME Group to BM&FBOVESPA, the largest exchange in Latin America, in September."
"The increased revenues and earnings posted by CME Group reflect the strength and stability of our business model and the continued success of our global growth plan," said CME Chief Executive Officer Craig Donohue. "We serve our expanding base of customers through the growth of new products that build on our core business and also through multiple non-core initiatives that strengthen our position in the exchange space. Going forward, for example, our proposed NYMEX transaction will enable us to diversify into energy and metals markets as well as expand into over-the-counter markets. In addition to new trading opportunities, our customers will benefit from the potential for significant cost savings and streamlined operations. We are confident in the value this transaction represents for shareholders of both companies and in the opportunity it provides for capitalizing on the global growth trend in derivatives."
All references to volume and rate per contract information in the text of this document exclude our non-traditional TRAKRS products, for which CME Group receives significantly lower clearing fees than other CME Group products, CME Group Auction Markets products, which were available to trade prior to July 2007, and Swapstream products.
CME Group Inc. Second-Quarter 2008 Results
Financial Highlights:
GAAP
($s in millions,
except per share) Q2 FY08 Q2 FY07 Y/Y YTD FY08 YTD FY07 Y/Y
Revenues $ 563 $ 329 71% $1,188 $ 661 80%
Expenses $ 220 $ 137 61% $ 446 $ 268 66%
Operating Income $ 343 $ 192 79% $ 742 $ 393 89%
Operating Margin % 61.0% 58.4% 62.5% 59.4%
Net Income $ 201 $ 126 60% $ 485 $ 256 89%
Diluted EPS $ 3.67 $ 3.57 3% $ 8.91 $ 7.26 23%
Pro Forma Non-GAAP
($s in millions,
except per share) Q2 FY08 Q2 FY07 Y/Y YTD FY08 YTD FY07 Y/Y
Revenues $ 563 $ 510 10% $ 1,188 $ 1,008 18%
Expenses $ 213 $ 211 1% $ 427 $ 420 2%
Operating Income $ 350 $ 299 17% $ 761 $ 588 30%
Operating Margin % 62.2% 58.7% 64.1% 58.3%
Net Income $ 215 $ 194 11% $508 $ 379 34%
Diluted EPS $ 3.93 $ 3.52 12% $ 9.34 $ 6.89 36%
NOTE: See the CME Group Inc. Reconciliation of Pro Forma Non-GAAP to GAAP Measures for detail related to the adjustments made to reach the pro forma results. The first quarter 2008 pro forma results are shown as excluding the impact of the company's FX hedge related to the BM&FBOVESPA SA investment.
Pro Forma Non-GAAP Second-Quarter 2008 Financial Results
Second-quarter 2008 volume averaged 11.1 million contracts per day, up 7 percent versus the same period in 2007. This volume growth resulted in $458 million in clearing and transaction fee revenue, an increase of 9 percent from $422 million in second-quarter 2007. The average rate per contract was $0.648 for the quarter, up one percent compared with the average rate per contract of $0.639 in second-quarter 2007.
CME Group processing services revenue for the combined company increased 32 percent to $19 million for second-quarter 2008 from $14 million for second-quarter 2007. NYMEX volume on CME Globex has increased every quarter since the NYMEX products began trading on CME Globex in June 2006. Additionally, second-quarter 2008 quotation data fees were up 23 percent to $60 million, in part due to the addition of Credit Market Analysis Limited (CMA) revenue.
Total pro forma operating expenses increased one percent to $213 million compared with the same period last year. In addition, second-quarter pro forma operating expenses were down slightly from the first quarter of this year despite the addition of expense related to CMA.
Second-quarter operating income on a pro forma basis was $350 million, an increase of 17 percent from $299 million for the year-ago period. The company's operating margin was 62 percent compared with 59 percent for the same period last year. Operating margin is defined as operating income as a percentage of total revenues.
Company Guidance
CME Group currently expects full-year 2008 pro forma operating expense to be closer to the bottom end of the previously stated guidance range of $855 to $870 million, excluding NYMEX.
CME Group will hold a conference call to discuss first-quarter results at 8:30 a.m. Eastern Time today. A live audio Webcast of the call will be available on the Investor Relations section of CME Group's Web site at http://www.cmegroup.com. An archived recording will be available for up to two months after the call.
CME Group (http://www.cmegroup.com/) is the world's largest and most diverse derivatives exchange. Formed by the 2007 merger of Chicago Mercantile Exchange Holdings Inc. (CME) and CBOT Holdings, Inc. (CBOT), CME Group serves the risk management needs of customers around the globe. As an international marketplace, CME Group brings buyers and sellers together on the CME Globex electronic trading platform and on its trading floors. CME Group offers the widest range of benchmark products available across all major asset classes, including futures and options based on interest rates, equity indexes, foreign exchange, agricultural commodities, and alternative investment products such as weather and real estate. CME Group is traded on the New York Stock Exchange and NASDAQ under the symbol "CME".
The Globe logo, CME, Chicago Mercantile Exchange, CME Group, Globex and E-mini, are trademarks of Chicago Mercantile Exchange Inc. CBOT and Chicago Board of Trade are trademarks of the Board of Trade of the City of Chicago, Inc. TRAKRS and Total Return Asset Contracts are trademarks of Merrill Lynch & Co., Inc. These trademarks are used herein under license. All other trademarks are the property of their respective owners. Further information about CME Group and its products can be found at http://www.cmegroup.com/.
Statements in this news release that are not historical facts are forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any forward-looking statements. Among the factors that might affect our performance are: our ability to obtain the required approvals and to satisfy the closing conditions for our proposed merger with NYMEX Holdings, Inc. and our ability to realize the benefits and control the costs of the proposed transaction; our ability to successfully integrate the businesses of CME Holdings and CBOT Holdings, including the fact that such integration may be more difficult, time consuming or costly than expected and revenues following the merger may be lower than expected; increasing competition by foreign and domestic entities, including increased competition from new entrants into our markets and consolidation of existing entities; our ability to keep pace with rapid technological developments, including our ability to complete the development and implementation of the enhanced functionality required by our customers; our ability to continue introducing competitive new products and services on a timely, cost-effective basis, including through our electronic trading capabilities, and our ability to maintain the competitiveness of our existing products and services; our ability to adjust our fixed costs and expenses if our revenues decline; our ability to continue to generate revenues from our processing services; our ability to maintain existing customers and attract new ones; our ability to expand and offer our products in foreign jurisdictions; changes in domestic and foreign regulations; changes in government policy, including policies relating to common or directed clearing or as a result of a combination with the Securities and Exchange Commission and the Commodity Futures Trading Commission; the costs associated with protecting our intellectual property rights and our ability to operate our business without violating the intellectual property rights of others; our ability to generate revenue from our market data that may be reduced or eliminated by decreased demand or the growth of electronic trading; changes in our rate per contract due to shifts in the mix of the products traded, the trading venue and the mix of customers (whether the customer receives member or non-member fees or participates in one of our various incentive programs) and the impact of our tiered pricing structure; the ability of our financial safeguards package to adequately protect us from the credit risks of clearing members; the ability of our compliance and risk management methods to effectively monitor and manage our risks; changes in price levels and volatility in the derivatives markets and in underlying fixed income, equity, foreign exchange and commodities markets; economic, political, geopolitical and market conditions; natural disasters and other catastrophes, our ability to accommodate increases in trading volume and order transaction traffic without failure or degradation of performance of our systems; our ability to execute our growth strategy and maintain our growth effectively; our ability to manage the risks and control the costs associated with our acquisition, investment and alliance strategy; our ability to continue to generate funds and/or manage our indebtedness to allow us to continue to invest in our business; industry and customer consolidation; decreases in trading and clearing activity; the imposition of a transaction tax on futures and options on futures transactions; and the seasonality of the futures business. More detailed information about factors that may affect our performance may be found in our filings with the Securities and Exchange Commission, including our most recent Quarterly Report on Form 10-Q, which is available in the Investor Relations section of the CME Group Web site. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
CME Group Inc. and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands)
June 30, December 31,
ASSETS 2008 2007
Current Assets:
Cash and cash equivalents $1,067,644 $845,312
Collateral from securities
lending - 2,862,026
Marketable securities, including
pledged securities 138,484 203,308
Accounts receivable, net of
allowance 237,346 187,487
Other current assets 85,858 55,900
Cash performance bonds and
security deposits 971,560 833,022
Total current assets 2,500,892 4,987,055
Property, net of accumulated
depreciation and amortization 389,828 377,452
Intangible assets - trading products 7,987,000 7,987,000
Intangible assets - other, net of
accumulated amortization 1,804,467 1,796,789
Goodwill 5,108,034 5,049,211
Other assets 772,411 108,690
Total Assets $18,562,632 $20,306,197
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $63,198 $58,965
Payable under securities
lending agreements - 2,862,026
Short-term debt 164,938 164,435
Other current liabilities 147,074 157,615
Cash performance bonds and
security deposits 971,560 833,022
Total current liabilities 1,346,770 4,076,063
Deferred tax liabilities 3,809,926 3,848,240
Other liabilities 77,567 76,257
Total Liabilities 5,234,263 8,000,560
Shareholders' equity 13,328,369 12,305,637
Total Liabilities and
Shareholders' Equity $18,562,632 $20,306,197
CME Group Inc. and Subsidiaries
Consolidated Statements of Income
(in thousands, except per share amounts)
Quarter Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
Revenues
Clearing and transaction
fees $458,492 $252,722 $983,559 $510,963
Quotation data fees 59,872 24,326 116,637 49,342
Processing services 18,552 37,560 36,034 72,319
Access and communication
fees 10,761 7,712 21,300 15,375
Other 15,511 6,689 30,768 13,341
Total Revenues 563,188 329,009 1,188,298 661,340
Expenses
Compensation and benefits 73,588 56,729 146,877 113,129
Communications 12,850 8,850 27,622 17,929
Technology support services 18,118 8,645 35,112 17,537
Professional fees and
outside services 16,074 12,110 30,825 21,282
Amortization of purchased
intangibles 17,901 322 34,111 628
Depreciation and
amortization 34,467 20,106 68,782 39,789
Occupancy and building
operations 17,211 9,361 33,944 18,188
Licensing and other fee
agreements 12,049 6,794 25,539 13,829
Restructuring 236 - 2,016 -
Other 17,234 13,848 41,349 26,178
Total Expenses 219,728 136,765 446,177 268,489
Operating Income 343,460 192,244 742,121 392,851
Non-Operating Income and Expense
Investment income 12,049 19,395 23,423 36,700
Gains (losses) on derivative
investments (13,065) - (15,262) -
Securities lending interest
income - 35,520 23,644 68,410
Securities lending interest
expense - (34,331) (18,219) (66,756)
Interest expense (1,240) (24) (3,344) (24)
Guarantee of exercise right
privileges (3,624) - 4,773 -
Equity in losses of
unconsolidated subsidiaries (3,941) (3,371) (7,870) (6,391)
Other non-operating expense (75) - (8,465) -
Total Non-Operating (9,896) 17,189 (1,320) 31,939
Income Before Income Taxes 333,564 209,433 740,801 424,790
Income tax provision (132,382) (83,558) (256,071) (168,887)
Net Income $201,182 $125,875 $484,730 $255,903
Earnings per Common Share:
Basic $3.69 $3.61 $8.96 $7.34
Diluted $3.67 $3.57 $8.91 $7.26
Weighted Average Number of Common
Shares:
Basic 54,500 34,882 54,125 34,867
Diluted 54,752 35,242 54,390 35,236
CME Group Inc. and Subsidiaries
Pro Forma Non-GAAP Consolidated Statements of Income
(in thousands, except per share amounts)
Quarter Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
Revenues
Clearing and transaction
fees $458,492 $422,276 $983,559 $832,170
Quotation data fees 59,872 48,502 116,637 98,600
Processing services 18,552 14,100 36,034 27,063
Access and communication
fees 10,761 9,334 21,300 18,634
Other 15,511 15,761 30,768 31,778
Total Revenues 563,188 509,973 1,188,298 1,008,245
Expenses
Compensation and benefits 73,588 76,319 146,877 154,415
Communications 12,850 12,512 27,622 25,458
Technology support services 18,118 16,340 35,112 33,137
Professional fees and
outside services 14,266 12,592 26,573 23,361
Amortization of purchased
intangibles 17,901 17,114 34,111 34,239
Depreciation and
amortization 30,296 31,957 60,611 63,100
Occupancy and building
operations 17,211 14,162 33,944 28,182
Licensing and other fee
agreements 12,049 10,030 25,539 20,433
Other 16,719 19,641 36,573 38,191
Total Expenses 212,998 210,667 426,962 420,516
Operating Income 350,190 299,306 761,336 587,729
Non-Operating Income and Expense
Investment income 12,115 26,397 23,489 50,079
Gains (losses) on
derivative investments - - - -
Securities lending interest
income - 35,520 23,644 68,410
Securities lending interest
expense - (34,331) (18,219) (66,756)
Interest expense (1,240) (46) (3,344) (261)
Equity in losses of
unconsolidated
subsidiaries (3,941) (3,638) (7,870) (7,077)
Total Non-Operating 6,934 23,902 17,700 44,395
Income Before Income Taxes 357,124 323,208 779,036 632,124
Income tax provision (141,733) (129,283) (271,238) (252,849)
Net Income $215,391 $193,925 $507,798 $379,275
Earnings per Diluted Common
Share $3.93 $3.52 $9.34 $6.89
Weighted Average Number of
Diluted Common Shares* 54,752 55,088 54,390 55,078
Note: Pro Forma Non-GAAP results exclude merger-related costs. The pro
forma results for 2007 reflect both the operating results for CME and CBOT
as if they were combined. See CME Group Inc. Reconciliation of GAAP to
Pro Forma Non-GAAP Measures for detail on the adjustments made to reach
the pro forma results. The first quarter 2008 pro forma results are shown
as excluding the impact of the company's FX hedge related to the
BM&FBOVESPA SA investment.
* Weighted average number of diluted common shares includes CBOT
sharecount for the entire period reported.
CME Group Inc. and Subsidiaries
Reconciliation of GAAP to Pro Forma Non-GAAP Measures
(in thousands)
Quarter Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
GAAP Results
Revenues $563,188 $329,009 $1,188,298 $661,340
Expenses 219,728 136,765 446,177 268,489
Operating income 343,460 192,244 742,121 392,851
Non-operating income and
expense (9,896) 17,189 (1,320) 31,939
Income before income taxes 333,564 209,433 740,801 424,790
Income tax provision (132,382) (83,558) (256,071) (168,887)
Net Income $201,182 $125,875 $484,730 $255,903
Pro Forma Adjustments
Revenues:
CBOT pre-merger revenue $- $204,424 $- $392,161
Common clearing service
elimination (1) - (23,460) - (45,256)
Total Pro Forma Revenue
Adjustment - 180,964 - 346,905
Expenses:
CBOT pre-merger expense - 109,830 - 208,049
Common clearing service
elimination (1) - (23,460) - (45,256)
Amortization of intangibles
(2) - 16,357 - 32,714
Other (3) (6,730) (28,825) (19,215) (43,480)
Total Pro Forma Expense
Adjustment (6,730) 73,902 (19,215) 152,027
Adjustment to operating income 6,730 107,062 19,215 194,878
Non-operating income and
expense:
CBOT pre-merger non-operating
income - 6,713 - 12,456
ERP guarantee (4) 3,624 - (4,773) -
BM&F (5) 13,206 - 23,793 -
Total Pro Forma Non-Operating
Income and Expense
Adjustment 16,830 6,713 19,020 12,456
Adjustment to income before
income taxes 23,560 113,775 38,235 207,334
Adjustment to income tax
provision (9,351) (45,725) (15,167) (83,962)
Adjustment to net income $14,209 $68,050 $23,068 $123,372
Pro Forma Non-GAAP Results
Revenues $563,188 $509,973 $1,188,298 $1,008,245
Expenses 212,998 210,667 426,962 420,516
Operating income 350,910 299,306 761,336 587,729
Non-operating income and
expense 6,934 23,902 17,700 44,395
Income before income taxes 357,124 323,208 779,036 632,124
Income tax provision(6) (141,733) (129,283) (271,238) (252,849)
Net Income $215,391 $193,925 $507,798 $379,275
Notes:
(1) Eliminate clearing services provided to CBOT prior to the merger.
(2) Add amortization of intangible assets recorded in purchase of CBOT.
(3) Reverse effect of restructuring, accelerated depreciation,
integration and legal expenses related to the merger with CBOT.
Also removes CBOT merger-related transaction costs that were expensed
and transaction costs related to the acquisition of Credit Market
Analysis Limited (CMA).
(4) Reverse impact of exercise right guarantee associated with
CBOT merger.
(5) Transaction costs related to investment in BM&FBOVESPA SA including
costs related to changes in the fair value of the company's FX hedge
associated with that investment.
(6) First-quarter 2008 includes tax benefit of $38.6 million due to a
change in Illinois state tax treatment for apportionment of revenues
sourced within the state.
CME Group Inc.
Quarterly Operating Statistics
(Pro forma for periods prior to 4Q 2007)
2Q 2007 3Q 2007 4Q 2007 1Q 2008 2Q 2008
Trading Days 64 63 64 61 64
Average Daily Volume (ADV)
(in thousands, average daily volumes combined for entire period)
Product Line 2Q 2007 3Q 2007 4Q 2007 1Q 2008 2Q 2008
Interest rates 6,670 8,060 6,290 8,251 6,467
Equity E-mini 2,127 3,057 2,817 3,628 2,833
Equity standard-size 180 202 166 201 161
Foreign exchange 527 635 561 640 665
Commodities & alternative
investments 818 716 740 949 933
Total 10,322 12,670 10,574 13,669 11,060
Venue
Open outcry 2,297 2,652 1,876 2,336 1,836
Electronic
(excluding TRAKRS) 7,838 9,806 8,528 11,097 9,054
Privately negotiated 188 212 169 236 170
Total 10,322 12,670 10,574 13,669 11,060
Average Rate Per Contract (RPC)
(in thousands, rate per contract generated from combined average daily
volumes for entire period)
Product Line 2Q 2007 3Q 2007 4Q 2007 1Q 2008 2Q 2008
Interest rates $0.516 $0.519 $0.530 $0.505 $0.522
Equity E-mini 0.700 0.673 0.687 0.684 0.668
Equity standard-size 1.334 1.451 1.427 1.506 1.453
Foreign exchange 1.090 0.951 0.985 0.927 0.907
Commodities & alternative
investments 1.034 1.032 1.074 1.119 1.134
Average RPC (excluding
TRAKRS) $0.639 $0.622 $0.648 $0.630 $0.648
Venue
Open outcry $0.492 $0.473 $0.517 $0.553 $0.572
Electronic (excluding TRAKRS) 0.626 0.613 0.629 0.609 0.629
Privately negotiated 2.948 2.878 3.057 2.345 2.427
Note: All volume and rate per contract data prior to 4Q 2007 is based
upon pro forma results. All data excludes our non-traditional TRAKRS
products, for which CME Group receives significantly lower clearing fees
than other CME Group products. Additionally, all data excludes Swapstream
products and CME Group Auction Markets products while the CME Group
Auction Market products were available prior to July 2007.
