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Cboe Reports Brisk Organic Revenue Growth and Higher Costs

By Asit Sharma - Feb 15, 2018 at 9:30AM

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The global options platform delivered a positive earnings report in its final quarter of 2017.

The combination of acquired revenue and vigorous demand for options trading instruments continues to propel the earnings of exchange holding company Cboe Global Markets, Inc.,(CBOE -0.75%) as fourth-quarter 2017 results released on Feb. 9 illustrate. 

Cboe Global Markets: The raw numbers

Metric Q4 2017 Q4 2016 Year-Over-Year Growth
Revenue $265.6 million $143.0 million 79.4%
Net income $254.6 million $44.7 million N/A*
Diluted earnings per share $2.26 $0.55 N/A

Data source: Cboe Global Markets, Inc. *Not applicable; difference too large for meaningful comparison; see below for special items affecting net income and earnings per share. 

What happened with Cboe Global Markets this quarter?

Stock chart on LCD screen; warm orange trend line on soothing blue chart area.

Image source: Getty Images.

  • Of the company's $122.6 million top-line surge, $111.5 was derived from its August 2017 acquisition of Bats Global Marketplace. Organic revenue expanded impressively by 8%, which the company attributed to stronger volume in its proprietary VIX (Cboe Volatility Index) instruments.

  • Operating costs increased to $156.9 million during the quarter, versus $68.1 million during the fourth quarter of 2016. This increase includes $43.0 million in amortization of intangible assets which were acquired through the Bats purchase, as well as $44.6 million in incremental operating expense from Bats. On an adjusted basis which combines Cboe's and Bat's pre-merger operating expenses, total operating expense rose by $0.4 million to $105.0 million, due to slightly higher compensation and benefits expenses.

  • Cboe's net income and diluted earnings per share were boosted from a remeasurement of the company's deferred tax assets in accordance with recently enacted U.S. tax legislation. A one-time tax benefit of $191.5 million resulted in a net addition of $153.0 in net earnings to the company's $104.1 million in pre-tax earnings during the quarter.

  • The exchange operator paid down $75 million of long-term debt, bringing the total of 2017 debt repayments against the $1 billion borrowed to acquire Bats to $400 million. Cboe's total long-term debt stood at $1.2 billion as of Dec. 31, 2017.

  • Cboe's two largest segments, options and U.S. equities, showed modest increases against the prior year quarter. Options revenue increased 3% to $130.0 million due to higher average daily volume (ADV) in VIX and Standard & Poor's 500 Index (SPX) options. This was offset by lower average revenue per contract (RPC) for options. U.S. equities revenue inched up by 1% to $69.0 million.

  • The company's third largest segment, futures, enjoyed a 31% revenue increase to $35.6 million. As in previous quarters, VIX futures paced the results, displaying a 21% improvement in ADV and a 7% rise in RPC. Trading in VIX futures marked record volume for the 13th consecutive year, with ADV advancing to 294,000 contracts.

  • European equities and global fx, which account for roughly 12% of total company revenue between them, expanded their top-lines by 17% and 18%, respectively.

  • The company reported that its December launch of bitcoin futures, Cboe Bitcoin Futures (XBT), proceeded smoothly. As of its first monthly settlement date, Jan. 17, over 124,000 XBT contracts had been traded, with a notional value of $1.5 billion.

What management had to say

During the company's earnings conference call, management took a few moments to address potential concern by shareholders over trading in VIX instruments and VIX-derived exchange traded products (ETPs), given the stock market's extreme volatility at the beginning of February: 

...The activity we see from issuers of XIV and SPXC is less than 5% of all VIX futures trading, representing average daily volume of about 12,000 contracts. It's important to note, that non-institutional holders of these ETPs in the last reported period, represented approximately just 21% of total holdings, with the remainder consisting of sophisticated institutional users, who employ inverse VIX ETPs, as part of a diverse mix of trading and investing strategies.

The company also held a separate conference call on Feb. 7 to address market volatility and reassure investors that it had very little direct exposure to the recent wild swings in VIX instruments. 

Looking forward

Cboe doesn't provide revenue guidance or net income guidance, but the company did tell investors to expect an increase in full-year adjusted operating expenses of between 1% and 3% in 2018, or between $420 million and $428 million.

The company also projected a 2018 effective tax rate of between 26.5% and 28.5%, a rate that's roughly eight to 10 percentage points less than prior years. Despite projected higher cash flow from the lower tax burden, the company is keeping its capital allocation priorities unchanged for now. Per management, these include reinvestment in the business, maintaining and increasing the company's dividend, and engaging in share repurchases where appropriate.

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Cboe Global Markets, Inc.
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