Exchange holding company Cboe Global Markets (NYSEMKT:CBOE) enjoyed brisk trading across multiple asset classes after two consecutive quarters of sluggish volume. Management also indicated that it expects robust utilization of the company's options and futures instruments during the 2019 trading year.
Let's step through highlights of the last three months and review management's perspective on the upcoming year. Note that all comparative numbers refer to the prior-year quarter, the fourth quarter of 2017.
Cboe Global Markets: The raw numbers
|Metric||Q4 2018||Q4 2017||Year-Over-Year Growth|
|Revenue||$334.4 million||$265.6 million||25.9%|
|Net income||$138.3 million||$257.4 million||(42.6%)|
|Diluted earnings per share||$1.23||$2.26||(45.6%)|
What happened with Cboe Global Markets this quarter?
Options net revenue surged 34% to $174.5 million on higher net transaction fees, as average daily volume (ADV) rose 23% and revenue per contract (RPC) increased by 17%. Trading in S&P 500 index (SPX) options set a new quarterly trading record. The options results were realized even as market share declined roughly 200 basis points to 38.5%.
After two consecutive quarters of weak volume in Cboe's proprietary Volatility Index (VIX) futures, ADV in these instruments improved by 18% over the prior-year quarter. Changes in futures mix resulted in a 6% RPC decline, somewhat dampening the effect of the higher volume. Total futures net revenue increased by 13% to $40.3 million.
In Cboe's equities segments, U.S. equities gained 18% in net revenue to $81.5 million, while European equities' net revenue increased by 29% to $24.3 million. U.S. equities enjoyed a 33% leap in ADV, while average daily notational value (ADNV) in European equities rose 19% to 10.6 billion euros.
Cboe's smallest segment, Global FX, continued to amplify its ADNV, which rose to $35.1 billion for the quarter. Net revenue rose 14% to $13.7 million.
The company noted that it exited 2018 with $57 million in run-rate synergies and is "on track" to hit its 2020 target of $85 million in cumulative realized synergies. These pertain to the company's merger with Bats Global Markets in 2017.
Cboe announced that it has begun the rollout of options that will track the 11 sector indexes of the S&P 500 index, known as "Select Sector" indexes.
After adjusting primarily for the amortization of intangibles acquired through the Bats purchase, the company's operating margin rose roughly 600 basis points to 66.6% -- the result of increased revenue during the quarter.
Despite the healthier operating profits, net income and earnings per share declined against the prior year, as the company booked a $153 million tax benefit in the fourth quarter of 2017. The tax benefit in that period consisted mostly of one-time adjustments resulting from year-end U.S. corporate tax legislation.
What management had to say
During Cboe's earnings conference call, CEO Edward Tilly discussed the outlook for volume in the company's flagship instruments:
Despite an 8% increase in the S&P 500 and a 35% decline in the VIX Index since year-end, market observers generally agree that higher volatility will become the new normal for stocks. They point to the same risk factors that fueled the market correction in 2018 and warn that the robust equity returns investors enjoyed over the past 10 years are unlikely to continue. As such, we expect that demand for equity hedges using SPX options, and VIX options and futures, will increase in 2019.
Tilly also discussed the company's long-held strategy of retail trader education and direct outreach to institutions to raise awareness of the company's products in both directional and hedging trading strategies:
In 2019, we remain committed to what has been a very successful playbook in growing the use of SPX options globally: educating new users, both retail and institutional, on the utility of SPX in virtually any market climate. We will continue to actively educate and market to our retail client segment, including through partnerships with key retail firms, and to our institutional base, where we still see considerable opportunity among large pensions and global asset managers. And while we continue to see increased trading during global trading hours, we believe there is significant untapped potential for growth in non-U.S. regions and are increasing our overseas educational efforts accordingly.
Cboe provides limited forward guidance to shareholders. In 2019, the company anticipates that adjusted operating expenses will land between $420 million and $428 million, which will represent, at the midpoint of the range, a decrease of less than 1% against 2018's adjusted operating expense. Management pegs the organization's full-year capital expenditure at between $50 million and $55 million during the year.
As for volume expectations, executives indicated on the earnings call that despite January's impressive stock market gains -- strong upward price movements can often reduce volatility and potentially depress VIX and SPX volumes -- the company is seeing more uncertainty in the markets over the past few weeks, which is a beneficial development. Irrespective of near-term market direction, management communicated that it generally sees a beneficial environment for Cboe's volatility-based trading instruments in 2019.