01—Abstract
Summary
Summary of the 10-Q filed November 8, 2016. Cited figures are marked; the original filing is the authoritative source.
Cboe Global Markets, Inc. (CBOE) reported a notable decrease in revenue and net income for the third quarter of 2016 compared to the same period in the prior year.
This decline was primarily driven by a significant drop in transaction fees, influenced by reduced trading volume and a shift in product mix towards lower-revenue per contract items. Operating expenses saw an increase, largely due to higher professional fees and outside services related to acquisition activity, impacting the operating margin. Despite the quarterly dip, the nine-month performance showed a slight increase in total operating revenues, though operating income and net income were down year-over-year.
This was mainly due to a substantial rise in operating expenses, particularly professional fees associated with the pending merger with Bats Global Markets, Inc. This significant merger, announced in September 2016 and expected to close in the first half of 2017, is a major strategic event that will reshape the company. The company's liquidity remains adequate, but the merger will necessitate significant capital, likely through debt financing, and introduces considerable integration risks and strategic shifts.
02—Key points
Key Highlights
- Total operating revenues for Q3 2016 decreased by 16.5% to $156.2 million, primarily due to a 22.7% drop in transaction fees.
- Transaction fees declined due to lower trading volume and a shift away from higher-revenue-per-contract products like index options.
- Operating expenses increased by 5.4% to $90.6 million in Q3 2016, driven by a 69.4% surge in professional fees and outside services, largely attributed to acquisition-related costs.
- Net income allocated to common stockholders for Q3 2016 fell by 40.1% to $40.3 million, resulting in diluted EPS of $0.50, down from $0.81 in Q3 2015.
- For the nine months ended September 30, 2016, total operating revenues slightly increased by 0.7% to $481.9 million, while net income decreased by 9.1% to $140.0 million.
- The company announced a significant merger agreement with Bats Global Markets, Inc. in September 2016, expected to close in the first half of 2017.
- Cash and cash equivalents decreased to $72.8 million as of September 30, 2016, from $102.3 million at the end of 2015, with a significant portion of future capital needs expected to be met through debt financing for the Bats merger.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in Q3 FY2016, Cboe Global Markets, Inc. kept $0.24.
- Revenue$168.7M100.0%
- Cost of revenue−$32.5M19.3%
- Gross profit$136.2M80.7%
- Operating costs−$70.4M41.7%
- Operating income$65.8M39.0%
- Interest, other & tax−$25.3M15.0%
- Net income$40.5M24.0%
04—Financials
Financial Highlights
Figures from 10-QQ3 FY2016filed November 8, 2016Financial Statements
Q3 FY2016 against Q3 FY2015
| Line item | Q3 FY2016Q3 FY2015 | Change |
|---|---|---|
| Revenue | $168.70M$187.03M | −9.8% |
| Cost of Revenue | $32.50M— | — |
| Gross Profit | $136.20M— | — |
| Operating Expenses | $70.40M$85.92M | −18.1% |
| Operating Income | $65.80M$101.11M | −34.9% |
| Interest Expense | $200K— | — |
| Net Income | $40.50M$67.52M | −40.0% |
| EPS (Basic) | $0.50$0.81 | −38.3% |
| EPS (Diluted) | $0.50$0.81 | −38.3% |
| Shares Outstanding (Basic) | 81.30M82.75M | −1.8% |
| Shares Outstanding (Diluted) | 81.30M82.75M | −1.8% |
05—Questions
Frequently Asked Questions
What is the most significant event impacting Cboe Global Markets in this filing period?
The most significant event is the announcement of the merger agreement with Bats Global Markets, Inc. (Bats) on September 25, 2016. This strategic combination is expected to close in the first half of 2017 and will involve substantial integration efforts and financing.
Why did Cboe's revenue decline in the third quarter of 2016?
Revenue declined primarily due to a 22.7% decrease in transaction fees. This was caused by an 11.8% drop in trading volume and a shift in the product mix towards less profitable contracts, such as equities and exchange-traded products, away from higher-revenue index options and futures.
What is the impact of the Bats merger on Cboe's financial position?
The merger is expected to require significant capital, with a commitment for up to $1.65 billion in debt financing. This will increase the company's leverage and financial risk. The integration process also presents considerable operational and strategic challenges, as detailed in the risk factors section.
How did operating expenses change in the third quarter, and what drove the increase?
Operating expenses increased by 5.4% to $90.6 million. The primary driver was a substantial 69.4% increase in professional fees and outside services, which rose by $8.8 million. This increase is mainly attributed to costs associated with the pending acquisition of Bats.
06—Continue