Last quarter, I noted how CME Group's (CME 1.56%) options and derivatives exchange was significantly benefiting from market volatility. Its average daily volume hit an all-time high of 22.2 million contracts, as uncertainty related to foreign exchange, foreign politics, and even bitcoin was driving speculative trades over its platform.
This quarter was more of a reversion to the mean. Volumes settled back down a bit, as the market's ups and downs were less dramatic. But CME Group still reported excellent earnings due to some savvy cost-cutting moves it made last year.
Let's take a closer look at the results.
Image source: Getty Images.
CME Group results: The raw numbers
| Metric | Q2 2018 | Q2 2017 | Year-Over-Year Change |
|---|---|---|---|
| Revenue | $1.060 billion | $925 million | 15% |
| Operating income | $667 million | $605 million | 10% |
| Adjusted EPS* | $1.74 | $1.23 | 41% |
Data source: CME Group. *On a fully diluted basis.
What happened with CME Group this quarter?
Last year, CME Group shut down several of its underperforming operations -- including its credit default swaps business and its European clearing house -- and redeployed the profits into its six core product lines. Now running an even more efficient ship, CME Group was able to report strong second-quarter results.
- Adjusted earnings per share increased an impressive 41%, largely thanks to margin expansion across the company's product lines.
- Average daily volume of 18.4 million contracts was down a bit from the first quarter (22.2 million), but still up 12% over last year.
- Average daily volume grew 30% year over year in Asia and has now doubled during the past five years.
- Average rate per contract of $0.757 was higher than the $0.706 of last quarter. The higher average rate was driven by increased volumes of CME's higher-priced commodity contracts, such as metals and agricultural crops.
What management had to say
Chairman and CEO Terrence Duffy acknowledged that the summer months can typically be slower for options trading. But he also noted that CME Group is showing broad-based strength in year-over-year comparisons.
"With double-digit growth in five of our six asset classes, Q2 2018 was our second best quarter ever in average daily volume, following record performance in the first quarter of 2018," Duffy said. "We continued to see strong global growth as our trading volume increased 30 percent in Asia and 9 percent in Europe. Total revenue grew 15 percent and, along with our continued focus on expense discipline, resulted in margin expansion and an adjusted earnings per share increase of more than 40 percent."
Looking forward
This quarter also marked a milestone for the company. CME Group has now paid out more than $10 billion to shareholders since 2012, when it enacted its dividend policy of paying out 50% of earnings as both regular and annual variable dividends. As CME continues to streamline its operations and fully integrate its recent NEX Group acquisition, it will boost the earnings that can be shared with investors as dividends.
This is a very profitable business that holds a very strong competitive position. Investors will watch for revenue to grow from rising volumes in 2018, which have been falling even more quickly to the company's bottom line.
