Global exchange operator Cboe Global Markets, Inc. (NYSEMKT:CBOE) reported healthy earnings growth, as lower operating expenses and tax benefits overcame top-line lethargy in the company's third-quarter results released on Nov. 2. Cboe compensated for sluggish overall volume through higher trading fee and service fee revenue.
Before we parse out the details, let's take a bird's-eye view of the past three months.
Cboe Global Markets: The raw numbers
|Metric||Q3 2018||Q3 2017||Year-Over-Year Growth|
|Revenue||$270.5 million||$269.7 million||0.03%|
|Net income||$85.0 million||$59.7 million||42.4%|
|Diluted earnings per share||$0.76||$0.53||43.4%|
What happened with Cboe Global Markets this quarter?
Average daily volume (ADV) in options, the company's largest revenue segment, was flat against the prior-year quarter at 6.7 million contracts. Market share declined by nearly 5 percentage points to 36.8%. Despite the lower volume and a 1% dip in revenue per contract (RPC), options net revenue crept up by 2% against the third quarter of 2017 to $133.2 million, accomplished through increased fees for multiply listed options, as well as higher access fees.
For the second consecutive quarter, weak volume characterized the company's proprietary Volatility Index (VIX) futures instruments. Year-over-year ADV in VIX futures slid 28% to 239,000 contracts, while RPC dipped 3% to $1.704. As a result, futures segment net revenue slumped by 23% from the comparable period to $30 million. After quarter's end, futures volume staged a comeback during a volatile October. More on that in a moment.
In Cboe's second largest segment, U.S. equities, market ADV rose 3% year over year to 6.3 billion shares, and revenue stepped up 2% to $71.4 million. The company attributed the top-line improvement to higher net transaction fees and exchange services fees, offset by lower market data revenue. Management expects that market data revenue will continue to remain under pressure in the coming quarters as Cboe attempts to gain market share as a low-cost provider of proprietary market data.
European equities net revenue achieved a handsome 21% advance over the third quarter of 2017, to $22.3 million, on the strength of net transaction fees and non-transaction revenue. The segment managed a modest volume gain of 1% as market average daily notational volume (ADNV) rose to 41.4 billion euros. The business notched a 2% improvement in market share, to 23.1%.
Global FX, Cboe's smallest segment, also posted a double-digit rise in its top line, as ADNV swelled by 19% over the prior-year quarter to $34.6 billion, pushing the business' total net revenue up 20% to $13.6 million. The company cited the healthy volume, an increase in market share of nearly 2%, and disciplined pricing as factors behind better results.
Operating margin rose nearly 2.5 percentage points to 46.6%, because of lower depreciation and amortization expense and other general and administrative expenses against the prior-year quarter.
Cboe's income tax expense slid by $15 million from the comparable quarter as a result of a lower effective tax rate from last year's U.S. corporate tax legislation. The tax benefit accounted for 25 percentage points of the quarter's 43% jump in earnings per share (EPS) over the third quarter of 2017.
Cboe repurchased $49.1 million of its shares on the open market during the quarter, bringing its year-to-date share-repurchase total to $140.9 million.
The company achieved $5 million of pre-tax synergies from mergers in the third quarter, primarily from its merger with Bats Global Markets in March of 2017. Cboe has realized $12.2 million of pre-tax synergies through the first nine months of 2018 and is on track to book $85 million of cumulative synergies by 2020.
What management had to say
During Cboe's third-quarter earnings conference call, CEO Edward Tilly discussed October's market volatility. Tilly observed that the rather orderly reaction of market participants enabled traders of VIX complex instruments to use income hedging strategies, as opposed to placing positions predominately to manage risk:
The return of higher volatility in October that led to record volumes in SPX [S&P 500 Index] options and VIX futures was fueled by an 11% decline in the S&P 500, comparable to the move we saw in February. Yet, the VIX Index and VIX futures suggest that the current volatility environment is substantially different than what we experienced earlier this year. We expect to see changes in the VIX Index when markets move and risk expectations change. We believe the difference this time is that the correction was not compressed over just a few days as it was in February. Rather, we saw an orderly repricing of risk that has occurred over a period of weeks, allowing traders to monetize hedges in both SPX and VIX options and reposition their exposures tactically. Regardless of market conditions, we remain focused on our commitments to product innovation, seamless trading solutions and leading-edge technology.
Cboe reaffirmed its full-year anticipated expense total in its third-quarter earnings release. Management still expects total-year operating expense to land between $420 million and $428 million. And capital expenditure is still anticipated to reach $35 million to $40 million, as the company continues its migration to Bats' technology. While management doesn't provide quarterly top-line guidance, October's market volatility has almost certainly provided Cboe with a robust first month of revenue in the current earnings period.