CBOE Cboe Global Markets (MM)

CHICAGO, Aug. 1, 2014 /PRNewswire/ -- CBOE Holdings, Inc. (NASDAQ: CBOE) today reported net income allocated to common stockholders of $42.6 million, or $0.50 per diluted share, for the second quarter of 2014, compared with $45.5 million, or $0.52 per diluted share, in the second quarter of 2013.  On an adjusted basis, net income allocated to common stockholders was $42.6 million, or $0.50 per diluted share, compared with $47.0 million, or $0.54 per diluted share, in the same period last year.  Operating revenue for the quarter was $143.9 million, down 5 percent compared with $150.8 million in the second quarter of 2013.

There were no non-GAAP adjustments for the second quarter of 2014.  Financial results presented on an adjusted basis for the second quarter of 2013 exclude certain items, including accelerated stock-based compensation and certain other expenses, which are detailed in the reconciliation of non-GAAP results.

"While second-quarter results reflected lackluster trading volume industry-wide and muted market volatility, CBOE posted solid financial results and continued to deliver long-term value, both to our shareholders and market participants," said Edward T. Tilly, CBOE Holdings Chief Executive Officer.  "We were pleased to increase our quarterly dividend as well as our share repurchase authorization and are very encouraged with the response to our extended trading hours for VIX futures, which now trade nearly 24 hours a day, five days a week.  Moreover, we continued to advance our strategic growth initiatives so that CBOE is well positioned to benefit in more favorable market conditions."

"During the second quarter, we generated $33 million in cash flow from operations and returned $73 million in cash to shareholders through dividends and share repurchases.  This brings our cumulative return of capital to nearly $975 million since 2010," said Alan J. Dean, CBOE Holdings Executive Vice President and Chief Financial Officer.  "We remain focused on creating value for our shareholders and are pleased that our strong cash flow generation allows us to both invest in our business and increase cash returned to shareholders."

Key Statistics and Financial Highlights

The table below highlights CBOE Holdings' operating results on a GAAP basis and an adjusted basis for the comparative quarters ended June 30, 2014 and 2013.  Financial results presented on an adjusted basis provide supplemental information to facilitate period-over-period comparisons by adjusting for certain items that management believes are not indicative of the company's core operating performance.

Revenues

Operating revenue was $143.9 million in the second quarter of 2014, down $6.9 million, or 5 percent, from $150.8 million in the second quarter of 2013.  The decrease primarily reflects lower revenue of $8.2 million in transaction fees and $0.7 million in regulatory fees, offset somewhat by an increase of $2.1 million in market data fees.

Transaction fees decreased 8 percent in the quarter driven by a 4 percent decrease in trading volume and a 4 percent decrease in the average revenue per contract (RPC) compared with the second quarter of 2013.  Additionally, this year's second quarter had one less trading day versus last year's second quarter.  Total trading volume in the second quarter was 304.4 million contracts, or 4.83 million contracts per day, compared with volume of 317.4 million contracts, or 4.96 million contracts per day, in last year's second quarter.  RPC was $0.322 compared with $0.334 in the second quarter of 2013. 

The decrease in RPC primarily resulted from a shift in the mix of products traded and higher volume-based incentives in the second quarter of 2014 for certain multiply-listed options (options on equities and exchange-traded products).  Lower-margin, multiply-listed options accounted for 66.1 percent of trading volume in the second quarter of 2014 compared to 65.3 percent in the second quarter of 2013.  Higher margin, index options and futures contracts accounted for 33.9 percent of trading volume in the quarter compared with 34.7 percent in the second quarter of 2013.   

The average revenue per contract represents total transaction fee revenue divided by total reported trading volume for Chicago Board Options Exchange (CBOE), C2 Options Exchange (C2) and CBOE Futures Exchange (CFE^®).

Adjusted Operating Expenses

Adjusted operating expenses were $74.2 million for the quarter, up $0.6 million, or 1 percent, compared with $73.6 million in the second quarter of 2013.  There were no adjustments in the second quarter of 2014.  For the second quarter of 2013, adjusted operating expenses exclude $0.8 million of accelerated stock-based compensation and $1.0 million of additional expense for the final resolution of an SEC investigation.   

The company's core operating expenses, which include total operating expenses less volume-based expenses, depreciation and amortization, accelerated stock-based compensation expense and unusual or one-time expenses, were $48.5 million for the second quarter of 2014, down $1.1 million, or 2 percent, compared with last year's second quarter.  The decline in core operating expenses primarily reflects a $1.7 million decrease in outside services, offset somewhat by increases of $0.3 million and $0.4 million in facilities costs and other expenses, respectively.

Volume-based expenses, which include royalty fees and trading volume incentives, were $15.8 million in the second quarter of 2014, an increase of $0.4 million, or 3 percent, compared with the same period last year.  This increase resulted from royalty fees and trading volume incentives each increasing by $0.2 million.  The increase in royalty fees primarily resulted from higher expenses for fees linked to order flow for certain multiply-listed options and fees related to market data sales. 

Operating Margin

The company reported an adjusted operating margin of 48.4 percent for the second quarter of 2014 compared with 51.2 percent for the second quarter of 2013.  Margins declined by 280 basis points this quarter, primarily due to lower operating revenue. 

Effective Tax Rate

The company reported an effective tax rate of 38.1 percent for the quarter versus 38.4 percent in last year's second quarter.  Year to date, the company's effective tax rate is 39.0 percent, in line with its guidance range for the full-year 2014 of 38.5 percent to 39.5 percent.

Operational Highlights and Recent Developments

• On July 10, CFE reported record trading volume in VIX futures during non-U.S. trading hours, when 59,650 contracts traded from Wednesday afternoon to Thursday morning.
• On July 7, CBOE introduced PM-settled, End-of-Month options series (EOM) -- with expiration dates falling on the last business day of the month -- for its S&P 500^® Index (SPX^SM) options.
• On June 22, CFE further expanded its trading hours for CBOE Volatility Index^® (VIX^® index) futures to nearly 24 hours a day, five days a week to accommodate Asian market hours and to provide a growing worldwide user base even greater access and flexibility in trading VIX futures.
• On April 10, CBOE began trading CBOE Short-Term Volatility Index^SM (VXST^SM Index or "Short-Term VIX Index") options with weekly expirations.

2014 Fiscal Year Financial Guidance

The company announced that, in light of the subdued trading volumes, it is taking steps to reduce expenses.  Based on these actions and year-to-date results, the company is lowering its guidance for core operating expenses for the 2014 fiscal year.  The company now expects core expenses to be in the range of $186.0 million to $190.0 million, down from its previous guidance of $191.0 million to $196.0 million. 

The company reaffirmed its financial guidance for the 2014 fiscal year for the following:

• Continuing stock-based compensation expense included in core expenses is expected to be approximately $13.0 million for the full year.
• Capital expenditures are expected to be in the range of $47.0 million to $50.0 million.
• Depreciation and amortization expense is expected to be in the range of $38.0 million to $40.0 million.
• Adjusted effective tax rate for the full-year 2014 is expected to be in the range of 38.5 percent to 39.5 percent. The most significant differences in the adjusted effective rate and the statutory rate are state income taxes and discrete items relating to the current period. Significant changes in trading volume, expenses, state and local tax rates and other items, including ongoing state and federal tax audits, could materially impact this expectation.

Return of Capital to Stockholders

As announced on July 30, 2014, CBOE Holdings' Board of Directors increased the company's quarterly dividend by 17 percent to $0.21 per share and authorized an additional $100 million for its share repurchase program.  This new authorization will be in addition to any unused amount remaining under the company's existing share repurchase authorizations.

The dividend increase is effective with the third quarter dividend, payable September 19, 2014, to stockholders of record as of August 29, 2014.   

During the second quarter of 2014, the company repurchased 1,011,178 shares of its common stock under its share repurchase program at an average price of $50.57 per share, for a total of $51.1 million.  Year to date, the company has repurchased 1,712,046 shares of its common stock under its share repurchase program at an average price of $51.56 per share, for a total of $88.3 million.

Since the inception of its share repurchase program in 2011 through June 30, 2014, the company has repurchased 6,351,870 shares of its common stock at an average price of $36.26 per share, for a total of $230.3 million.

At July 30, 2014, the company had approximately $150.2 million of availability remaining under its existing share repurchase authorizations.

Earnings Conference Call

Executives of CBOE Holdings will host a conference call to review its second quarter financial results today, August 1, 2014, at 8:30 a.m. ET/7:30 a.m. CT.  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 from the United States or Canada, or (253) 237-1167 for international callers.  Telephone participants should place calls 10 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 11:00 a.m. CT, August 1, 2014, through 11:00 p.m. CT, August 8, 2014, by calling (855) 859-2056 within the U.S. and Canada, or (404) 537-3406 for international callers, using replay code 68813605.

About CBOE Holdings

CBOE Holdings, Inc. (NASDAQ: CBOE) is the holding company for Chicago Board Options Exchange (CBOE), CBOE Futures Exchange (CFE) and other subsidiaries.  CBOE, the largest U.S. options exchange and creator of listed options, continues to set the bar for options and volatility trading through product innovation, trading technology and investor education. CBOE Holdings offers equity, index and ETP options, including proprietary products, such as S&P 500 options (SPX), the most active U.S. index option, and options and futures on the CBOE Volatility Index (the VIX Index). Other products engineered by CBOE include equity options, security index options, Weeklys options, LEAPS options, FLEX options, and benchmark products such as the CBOE S&P BuyWrite Index (BXM). CBOE Holdings is home to the world-renowned Options Institute and www.cboe.com, the go-to place for options and volatility trading resources.

Forward-Looking Statements

This press release may contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those statements that reflect our expectations, assumptions or projections about the future and involve a number of risks and uncertainties. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause actual results to differ materially from that expressed or implied by the forward-looking statements, including: the loss of our right to exclusively list certain index options and futures products; increasing price competition in our industry; compliance with legal and regulatory obligations and obligations under agreements with regulatory agencies; decreases in the amount of trading volumes or a shift in the mix of products traded on our exchanges; our ability to operate our business, monitor and maintain our systems or program them so that they operate correctly, including in response to increases in trading volume and order transaction traffic; legislative or regulatory changes; increasing competition by foreign and domestic entities; our ability to operate our business without violating the intellectual property rights of others and the costs associated with protecting our intellectual property rights; our ability to maintain access fee revenues; our ability to protect our systems and communication networks from security risks, including cyber-attacks; economic, political and market conditions; our ability to attract and retain skilled management and other personnel; our ability to maintain our growth effectively; our dependence on third party service providers; and the ability of our compliance and risk management methods to effectively monitor and manage our risks. 

More detailed information about factors that may affect our performance may be found in our filings with the SEC, including in our Annual Report on Form 10-K for the year ended December 31, 2013 and other filings made from time to time with the SEC.

The condensed consolidated statements of income, balance sheets and statements of cash flows are unaudited and subject to reclassification.

CBOE-F

Trademarks:

CBOE^®, Chicago Board Options Exchange^®, CBOE Volatility Index^®, CFE^®, Execute Success^®, FLEX^®, LEAPS^® and VIX^® are registered trademarks and BuyWrite^SM, BXM^SM, CBOE Futures Exchange^SM, CBOE Short-Term Volatility Index^SM, SPX^SM, The Options Institute^SM, VXST^SM and Weeklys^SM are service marks of Chicago Board Options Exchange, Incorporated (CBOE).  C2^SM and C2 Options Exchange^SM are service marks of C2 Options Exchange, Incorporated (C2).  Standard & Poor's^®, S&P^® and S&P 500^® are registered trademarks of Standard & Poor's Financial Services LLC and have been licensed for use by CBOE, C2 and CFE.

Non-GAAP Information

In addition to disclosing results determined in accordance with GAAP, CBOE Holdings has disclosed certain non-GAAP measures of operating performance.  These measures are not in accordance with, or a substitute for, GAAP, and may be different from or inconsistent with non-GAAP financial measures used by other companies.  The non-GAAP measures provided in this press release include core operating expenses, adjusted operating expenses, adjusted operating income, adjusted operating margin, adjusted net income, adjusted net income allocated to common stockholders and adjusted diluted earnings per share.

Management believes that the non-GAAP financial measures presented in this press release, including adjusted net income and core operating expenses, provide useful and comparative information to assess trends in our core operations and a means to evaluate period-to-period comparisons.  Non-GAAP financial measures disclosed by management, including adjusted diluted EPS, are provided as additional information to investors in order to provide them with an alternative method for assessing our financial condition and operating results.

The table below shows core operating expenses, which is the company's operating expenses after excluding (i) volume-based expenses, (ii) depreciation and amortization expense, (iii) accelerated stock-based compensation expense and (iv) other unusual or one-time expenses.

The table below shows the reconciliation of each financial measure from GAAP to non-GAAP.   The non-GAAP financial measures exclude the impact of those items detailed in the footnotes below and are referred to as adjusted financial measures.  There were no non-GAAP financial measures in the second quarter of 2014.

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SOURCE CBOE Holdings, Inc.