10-QPeriod: Q3 FY2012

Cboe Global Markets, Inc. Quarterly Report for Q3 Ended Sep 30, 2012

Filed November 6, 2012For Securities:CBOE

Summary

Cboe Global Markets, Inc. (CBOE) reported mixed financial results for the nine months ended September 30, 2012. While total operating revenues saw a slight decrease of 1.4% to $382.3 million compared to the prior year, net income increased by 9.4% to $117.7 million. This performance was driven by strategic fee adjustments implemented early in the year, which helped to increase market share in exchange-traded options contracts to 28.4% despite an overall decrease in trading volume. The company also benefited from a lower effective tax rate due to discrete items and a new Illinois tax apportionment method, contributing to the rise in net income. Operationally, the company experienced a decline in transaction fees, largely due to lower trading volumes in equity and ETF options, though this was partially offset by strong growth in futures, particularly for the VIX Index. Expenses were managed effectively, with total operating expenses seeing a slight decrease. Cboe also continued its commitment to returning capital to shareholders through dividend payments and a significant share repurchase program, which saw $49.7 million in repurchases during the first nine months of 2012. The company is also in the process of migrating its trading platform to New Jersey, a significant operational undertaking.

Financial Highlights

41 data points
Beta

Revenue

$128.32M

Net Income

$45.76M

35.7% Net Margin

EPS (Diluted)

$0.52

Total Assets

$377.53M

Cash & Equivalents

$160.28M

Free Cash Flow

$54.13M

Financial Statements
Beta
Revenue$128.32M
Operating Expenses$67.46M
Operating Income$60.86M
Net Income$45.76M
EPS (Basic)$0.52
EPS (Diluted)$0.52
Shares Outstanding (Basic)87.27M
Shares Outstanding (Diluted)87.27M

Key Highlights

  • 1Net income increased by 9.4% to $117.7 million for the nine months ended September 30, 2012, compared to $107.6 million in the prior year.
  • 2Total operating revenues decreased by 1.4% to $382.3 million for the nine months ended September 30, 2012, primarily due to lower transaction and access fees.
  • 3Market share in total exchange-traded options contracts increased to 28.4% for the nine months ended September 30, 2012, up from 26.7% in the prior year, attributed to fee changes.
  • 4The effective tax rate decreased to 35.8% for the nine months ended September 30, 2012, from 42.7% in the prior year, due to discrete tax items and a new Illinois tax apportionment method.
  • 5Trading volume in futures, particularly on the VIX Index, saw significant growth, while options trading volume declined overall.
  • 6The company repurchased $49.7 million of its common stock under its share repurchase program during the first nine months of 2012.
  • 7Significant expenses related to outside services increased, largely due to legal proceedings and regulatory compliance reviews.

Frequently Asked Questions

The increase in net income was primarily driven by a lower effective tax rate, which fell from 42.7% to 35.8% for the nine months ended September 30, 2012. This reduction was due to a $7.7 million benefit from a Section 199 deduction and a new Illinois tax apportionment method. Additionally, strategic fee changes implemented at the beginning of 2012 helped to increase market share, and operating expenses were managed effectively, leading to improved profitability.

The company experienced a decrease in trading volume for options contracts across equities, indexes, and ETFs. However, futures contracts, particularly those on the VIX Index, showed significant growth. For the nine months ended September 30, 2012, total options contracts volume decreased by 7.9%, while futures contracts volume increased by 68.1%.

Cboe has an active share repurchase program. In July 2012, the board authorized an additional $100 million for repurchases, on top of a previous $100 million authorization. For the nine months ended September 30, 2012, the company repurchased $49.7 million worth of its common stock. Notably, no shares were repurchased in the third quarter of 2012 (July-September).

The company is involved in legal proceedings, including patent litigation and an ongoing index options litigation case. While management believes the ultimate liability from these proceedings is not expected to have a material effect on the company's financial position, liquidity, or capital resources, an adverse outcome could impact earnings in a given reporting period. A significant development in the Index Options Litigation was the denial of ISE's petition for leave to appeal, reinforcing a prior injunction against ISE.